Portfolio Fine-tuning Free Service Of Many Advisers

Ask Humberto HUMBERTO CRUZ

February 11, 1998|HUMBERTO CRUZ

Q: Our financial adviser has recommended an analysis to ``fine tune'' the investment mix in our portfolio and maximize our earnings within our accepted level of risk. We have hesitated at doing this due to the fee involved. We have more than $600,000 invested with him. Does this kind of analysis pay for itself in increased returns, or is the financial planner trying to make more money?

A: What you are talking about often goes by the fancy term of ``portfolio optimization.'' Or, to put it in simple terms, trying to find the mix of investments that, without taking on more risk than you are willing to assume, is likely to give you the biggest return.

Quite a bit of academic research supports the idea that the key to investment success while controlling risk is how you split your money among different ``asset classes,'' not the specific securities you buy.

In other words, what's most important is what percentage of your money you put in stocks, bonds and cash, and, within stocks and bonds, how much in each type or ``investment style,'' such as foreign or domestic, big company or small, growth or value stocks, short-term or longer-term bonds.

Different mixes result in different expected rates of return, as well as higher or lower volatility. You want either the biggest return for the volatility or risk you are willing to assume, or the lowest volatility for the return you need to achieve.

Not everyone agrees with this theory, though, and recent market behavior has cast some doubts on its merits. And, as I am sure you know, there are no guarantees that a strategy that has worked well in the past will necessarily do so in the future.

That said, this concept of fine-tuning your asset allocation or investment mix is used by many well respected financial planners with the aid of ``mathematical optimizer'' software, and provides a disciplined approach to investing.

My question is, what has your financial adviser been doing up to now? What he is suggesting now is what many planners do as a matter of course. With more than $600,000 to invest you can shop around for a planner that won't charge you extra for this service.

Q: As you probably know, there was an error in your column about taking minimum withdrawals from your individual retirement account.

A: My thanks to Robert B. Koch of Albuquerque, N.M., for being the first of many to make me aware of this error.

In some papers where this column runs _ luckily not this one _ the age 701/2 came out as 70 when the symbol for ``1/2'' was gobbled up in the electronic transmission of the text. As a result, the column that Koch and many others saw said incorrectly that, if you turned 70 last year, this coming April 1 is the deadline for starting to take money out of your traditional IRA.

Because the rule is rather complicated, I'd like to explain it in more detail, even to those readers who got the correct age.

The basic rule is that you have to start taking withdrawals or ``minimum required distributions'' from your IRA in the calendar year in which you turn 701/2. (The rule doesn't apply to the new Roth IRAs).

For example, I was born Aug. 26, 1945 so I will turn 701/2 in 2016. By the end of that year, I will have to follow Internal Revenue Service rules and tables to determine the minimum I must take out of my regular IRA each year to avoid penalties. I can always take more out, but not less.

The IRS rules, however, give us the option but not the obligation to defer the first withdrawal until April 1 of the year following the year in which we turn 701/2 (Honest, that's what the law says). So I may choose to delay taking that first withdrawal until April 1, 2017.

But then I would have to take the second withdrawal by Dec. 31, 2017, because there are no more deferrals.

Why is this important? Because by delaying the first withdrawal you may save on taxes that year. But then you need to know you'll have to make two withdrawals the following year, which may push you into a higher bracket and cost you more in taxes than what you saved earlier.